In re BankEast Corp.

• Decision Date: 04 September 1991
• Docket Number: Bankruptcy No. 89-1981.
• Citation: 132 BR 665
• Parties: In re BANKEAST CORPORATION, Debtor.
• Court: U.S. Bankruptcy Court — District of New Hampshire

132 B.R. 665 (1991)

In re BANKEAST CORPORATION, Debtor.

Bankruptcy No. 89-1981.

United States Bankruptcy Court, D. New Hampshire.

September 4, 1991.

Daniel W. Sklar, Manchester, N.H., debtor.

Dave Sears, Manchester, N.H., for debtor.

Van Oliver, Andrews & Kurth, Dallas, Tex., Timothy P. Smith, Manchester, N.H., for Phoenix Mut. Life Inc. Co., John Alden Life Inc. Co.

Albert A. Notini, Hale and Dorr, Manchester, N.H., for Creditors Committee.

Peter Nils Baylor, Nutter, McClennen & Fish, Boston, Mass., for Joseph and Pamela Trusdale.

Charles W. Morse Jr., Friedman & Atherton, Boston, Mass., for Walter DeWitt.

Frederic R. Dawe, pro se.

MEMORANDUM OPINION

JAMES E. YACOS, Bankruptcy Judge.

The plan proponents in this case seek confirmation of their amended plan. At both the disclosure statement hearing on July 19, 1991 and confirmation hearing on August 30, 1991 this court expressed concern over the scope of the proposed retained jurisdiction of this court over postconfirmation litigation. The plan proponents are a creditors' group who filed a plan of reorganization following the termination of the debtor's exclusivity period. The plan creates a creditors' trust with various enforcement powers as to the reorganized debtor's assets in the event that the plan note in favor of the creditors' trust goes into default following confirmation of the plan. The plan also provides for various implementing actions and transfers of property involving the debtor and its various wholly owned subsidiaries, including an operating bank.

At the confirmation hearing the plan proponents presented a revised proposal regarding retained jurisdiction. However the revised proposal is still too broad, and for the reasons stated herein I am confirming the plan but with a narrower retained jurisdictional provision. For reference, the original proposed retention of jurisdiction provisions of the plan, the revised proposal, and the ultimate retention of jurisdiction provisions the Court has put in the confirmation order are attached to this Opinion as Annexes A, B and C respectively.

The seminal case on retention of jurisdiction generally is North American Car Corp. v. Peerless Weighing & Vending Mach. Corp., 143 F.2d 938, 940 (2d Cir. 1944). In that case, the often quoted words of Judge Charles E. Clark are as follows:

We have had occasion before to deplore the tendency of District Courts to keep reorganized concerns in tutelage * * * by orders purporting to retain jurisdiction for a variety of purposes, extending from complete supervision of the new business to modifications of detail in the reorganization * * * Since the purpose of reorganization clearly is to rehabilitate the business and start it off on a new and to-be-hoped-for more successful career, it should be the objective of courts to cast off as quickly as possible all leading strings which may limit and hamper its activities and throw doubt upon its responsibility.

This case was preceded by another case in the Second Circuit that dealt with the more limited issue before this Court of retention of jurisdiction for post-confirmation litigation. In In re Ambassador Hotel Corp., 124 F.2d 435 (2d Cir.1942) the court ruled that litigation over whether the voting trust certificates issued pursuant to the plan of reorganization were valid under state law five years after confirmation was not properly a matter for the reorganization court to handle. Judge Swan gave the following explanation which is the first guidepost for the decision I must make:

The future fate of the corporation was not within the control of the bankruptcy court, nor could that court reserve power to adjudicate controversies in which it might become involved — whether they should arise from a change in state law or from the corporation\'s own conduct, as for example, negligent injury to some guest of the hotel or failure to pay current bills . . . In selecting such a corporation as an instrumentality of reorganization, the bankruptcy court sent it out into the state as fully subject to state law as though the court had had nothing to do with its creation. There is no more reason to exclude the state court from jurisdiction to determine the rights of holders of voting trust certificate under the New York statute on the ground that its judgment may modify the plan, than there would be to enjoin a quo warranto proceeding against the corporation or even the prosecution of a large tort claim. A judgment of ouster in quo warranto or the entry of a very large money judgment in a personal injury action might equally disrupt execution of the plan of reorganization. But the bankruptcy court by confirming a plan of reorganization does not guarantee that the plan will be carried out regardless of what may befall the new corporation; nor does it have ancillary jurisdiction to control litigation respecting future events which may affect the new corporation\'s ability to carry out the plan.

Id. at 436-37.

This decision was followed in In re President Realty Co., Inc., 67 F.Supp. 390 (D.N.J.1946) where the court refused to take jurisdiction over of a controversy between stockholders and director-trustees of a reorganized company. This case is particularly instructive because the court stated that even if the confirmation order permitted the court to retain jurisdiction the court would have to decline when presented with the litigation.

Another Bankruptcy Act case commenting on the narrowness of post-confirmation litigation jurisdiction is Claybrook Drilling Co. v. Divanco, Inc., 336 F.2d 697, 701 (10th Cir.1964). Although this issue was not directly implicated in the decision, the court did say:

Thus a court may retain jurisdiction, after confirmation, to guarantee that the plan of reorganization is complied with, but it may not keep the corporation in "perpetual tutelage" by exercising control over all aspects of the corporate conduct or by assuming jurisdiction over controversies between the reorganized corporation and third parties.

A more recent Bankruptcy Act case establishing this principle is In re J.T. Gerken Trucking, Inc., 10 B.R. 203 (Bankr. N.D.Ohio 1981). There the court held that affirmation of a collective bargaining agreement in the plan did not give the bankruptcy court jurisdiction over postconfirmation disputes arising from that agreement.

In short, the Act cases maintain that:

The order of confirmation marked the commencement of the period when a debtor was weaned from dependence on the bankruptcy court\'s injunctive powers so as to stand on its own feet with respect to postconfirmation matters.

In re Morgan & Morgan, 24 B.R. 518, 521 (Bankr.S.D.N.Y.1982).

The primary statutory authority for this principle was Section 227 of the Act¹, which is substantively similar to 11 U.S.C. § 1142(b)² of the Bankruptcy Code. Thus, one would expect cases under the Code would be similar. My search of the case law has not uncovered any cases squarely confronting this issue, but some contain supporting language.

In In re Roger J. Au & Son, Inc., 123 B.R. 31 (Bankr.N.D.Ohio 1990), for example, the Court held it did not have subject matter jurisdiction over an adversary proceeding between the debtor's principal and debtor's surety even though the plan provided that the Court would have jurisdiction over all pending adversary proceedings post-confirmation. Although this case does not directly confront the problem before me, it does contain language reminiscent of the Act cases. The Court stated:

While the court may properly retain jurisdiction over postconfirmation matters under 11 U.S.C. § 1142(b) pursuant to a plan provision, it may not expand its jurisdiction merely by asserting it in a reorganization plan. In re Tri-L Corp., 65 B.R. 774 (Bankr.D.Utah 1986); In re Terracor, 86 B.R. 671 (D.Utah 1988) (language of plan not controlling to retain jurisdiction beyond scope of Code).

Similarly, in In re Greenley Energy Holdings of Pennsylvania, Inc., 110 B.R. 173 (Bankr.E.D.Pa.1990), the court held the plan did not give the court jurisdiction over a post-confirmation dispute involving shareholders. Nevertheless, the court did note there are parameters on a court's jurisdiction. Judge Scholl stated:

There is no doubt that the bankruptcy court\'s jurisdiction continues postconfirmation to "protect its confirmation decree, to prevent interference with the execution of the plan and to aid otherwise in its operation." Id. quoting In re Dilbert\'s Quality Supermarkets, Inc., 368 F.2d 922, 924 (2d Cir.1966). See also 11 U.S.C. § 1142; and In re Almarc, supra, 94 B.R. 361 at 363-65 Bankr. E.D.Pa.1988.

However, courts have attempted to balance the need to retain jurisdiction postconfirmation with the need to end the reorganization process at some point. For example in In re J.T. Gerken Trucking, Inc., 10 B.R. 203, 204 (Bankr. N.D.Ohio 1981), the court concluded that "affirmation of the collective bargaining agreement in the plan does not confer jurisdiction upon the bankruptcy court over postconfirmation controversies.

* * * * * *

. . . the court in Tri-L cautions, id. at 778, that a reservation of jurisdiction in the plan or confirmation order "beyond what is necessary to effectuate the plan of reorganization is beyond the power of the bankruptcy court." See also Claybrook Drilling Co. v. Divanco, 336 F.2d 697, 700-01 (10th Cir.1964); Reese v. Beacon Hotel Corp., 149 F.2d 610, 611 (2d Cir.1945); In re Flatbush Ave.-Nevins St. Corp., 133 F.2d 760, 762 (2d Cir. 1943); and Almarc, 94 B.R. at 365-66.

Id. at 180, 181.

With regard to the present reorganization case before the Court, the Court's determination as to an appropriate balancing of the interests of the plan proponents and nondebtor prospective litigants is embodied in the confirming order provisions set forth in Annex C of this Opinion, in accordance with the case law development on this point cited above. Basically, the Court will retain jurisdiction only to...